New analysis: wind power ‘bonus’ could cut bills by £25 this winter, and £45 next winter
A decision by Ofgem [1] has paved the way for wind farms to help ease the cost-of-living crisis by paying back to cut bills this October.
By George Smeeton
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New analysis by the Energy and Climate Intelligence Unit (ECIU) finds that this step could take £25 a year off electricity bills from this October. By next winter, if the wholesale price of electricity remained at current high levels, the payback would be around £45 a year, and this is only set to grow in future years as more lower cost windfarms come online. [2]
Under the government’s Contracts for Difference (CfD) scheme, wind farms are paid a fixed price for electricity, and when the wholesale price exceeds this ‘strike price’ they pay back the difference. Previously the process for these payments reaching bills was unclear and the benefit was delayed. An Ofgem decision in June means CfD wind farms will bring down household bills quicker, starting this October under the new price cap.
John Penrose MP said: “This is a small but very welcome dividend from cheap renewable energy producers, where the prices are now miles cheaper than the spiralling costs of gas. The good news is that, as more giant offshore wind farms plug into the grid over the next few years, this bonus should grow.”
ECIU has also calculated that come the winter price caps, which are expected to average out at almost £3,500, the payback from CfD wind farms will see ‘green levies’ for renewables that displace gas power generation drop to just 2% of the average dual fuel bill. [3]
Jess Ralston, Senior Analyst at ECIU, said: “With the high gas price pushing up the average energy bill by at least £2,000 this wind power saving is modest, but with gas prices predicted to stay high for many years, we are reaching the turning point where renewables subsidise bills rather than the other way around.”
Recent CfD auctions saw new offshore wind farms agree to generate at a fixed electricity price that is around four times cheaper than the current cost of gas power stations. [4]
Previous analysis from the Low Carbon Contracts Company (which manages payments to and from wind farm operators) estimated that £1.3bn would be paid back by CfDs in the 18 months from Q4 2021 [5], but with wholesale prices then rising and seeming likely to stay high for the foreseeable future, ECIU estimates CfDs could repay around £1.5bn over that 18 month period to Q1 2023.
ECIU analysis from earlier this year found that a similar gas crisis in 2030 with the 50GW of offshore wind target achieved would see payback of £34bn a year, equivalent to at least £500 for each home. [6]
Notes to editors
1. Decision on amending the methodology for setting the Contracts for Difference (CfD) cap allowance (Ofgem, June 2022): https://www.ofgem.gov.uk/publications/decision-amending-methodology-setting-contracts-difference-cfd-cap-allowance
2. Estimated cost savings of £25 a year from October 2022 are based on: 5.3GW of wind farms currently operating with CfDs, each with its own load factor and strike price; a day-ahead wholesale price of £240/MWh (as seen for much of summer 2022); and allocating 43% of savings to households and then splitting that between 28million homes. Ofgem has published illustrative savings of £11–12 for the six-month winter period, but based on LCCC forecasts from when future wholesale prices were predicted to be lower. Estimated savings of £45 a year from October 2023 are based on further wind farms operating with CfDs, taking the total capacity to 7.6GW.
3. The £25 repayment from CfDs will reduce the net level of levies to support renewables that displace gas power generation to around £70, which would be 2% of the average annual bill. Levies that fund insulation and bills support for low-income households will amount to less than 2% of the average bill, with levies overall being less than 4%. Average bill is taken to be the almost £3,500 forecast by Cornwall Insights in early August for this winter: https://www.cornwall-insight.com/press/price-cap-to-remain-significantly-above-3000-a-year-until-at-least-2024/
4. Reporting of results of CfD Allocation Round 4 (Carbon Brief, July 2022): https://www.carbonbrief.org/analysis-record-low-price-for-uk-offshore-wind-is-four-times-cheaper-than-gas/
5. Previous forecast CfD repayments out to Q1 2023 (LCCC, April 2022): https://www.lowcarboncontracts.uk/events/webinars/cfd-interim-levy-rate-and-total-reserve-amount-ilrtra-q3-2022
6. CfD repayment forecasts with 50GW of offshore wind (ECIU, July 2022): https://eciu.net/media/press-releases/2022/latest-round-of-renewables-would-be-paying-back-7bn-under-current-prices-over-100-off-bills
For more information or for interview requests:
George Smeeton, Head of Communications, ECIU, Tel: 07894 571 153, email: george.smeeton@eciu.net